What is Profit Margin?

In Mathematical terms: 

Profit Margin = Net Profits (or Income) / Net Sales (or Revenue) 

Profit Margin = (Net Sales - Expenses) / Net Sales 

Profit Margin = 1- (Expenses / Net Sales) 

Profit margin is used to show the profitability capability of bigger sectors as well as national/regional markets. In short, profit margin is a globally adopted measure for profit generating ability of the business, which also indicates its future potential for the same. 

Back to: Accounting & Taxation

Example of Calculating Profit Margin

Consider a simple example, if a business acquired net sales worth $100,000 in the last quarter and incurred $80,000 towards expenses, then Profit Margin = 1 - ($80,000 / $100,000) = 1- 0.8 = 0.2 or 20% It shows that in the quarter, the business generated the profits worth 20 cents per each dollar worth of sale. This example is the base case for our future comparisons in this article.

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns